Failing on Two Fronts

Posted
on February 9, 2015, 6:49 pm

In a new CEPR report out today, I argue that the US labor market is failing on two fronts. The first failure is the decades-long stagnation of real wages at the middle and the bottom of the wage scale –even as earnings at the top have grown rapidly. The second failure, only apparent since the early 2000s, is the sharp deterioration in job creation.

In the standard view, high and rising wage inequality was supposed to have been the secret ingredient that allowed the US economy to create jobs more rapidly than other more “rigid” economies. I’ve never been convinced by that particular argument, but at least before about 2000 there was a case that the US economy was doing a decent job creating jobs, whatever the specific cause. But, as this new report demonstrates, since the early 2000s, the US employment performance has been pretty dismal. If inequality was ever driving job creation, it hasn’t been doing so for more than a decade.

I place the blame for both of these failures squarely on economic policy. A broad set of policies –from the decline in the value of the minimum wage to a string of bad trade deals– have undermined the bargaining power of workers, driving up inequality (see an older CEPR report for a longer discussion). Meanwhile, bad macroeconomic policy has simultaneously reinforced this downward pressure on wages and hobbled the once impressive US “jobs machine.”